Compliance: CBDT’s revised 3CD form leaves taxpayers in a soup

Indian businesses, gearing up to file income tax returns by September 30 this year, are in a spot over the additional burden of compliance, thanks to the government’s revised 3CD form, which asks for more disclosures from them.

Form 3CD is the prescribed format for a document that needs to accompany compulsory tax audits for certain class of taxpayers. Under this requirement, Form 3CD is a statement of specifics.

In a surprise move, the Central Board of Direct Taxes (CBDT) in a notification dated July 20 made revisions to the Tax Audit Report (TAR) in Form 3CD for FY 2017-18. This is effective from August 20, 2018.

This amended Form 3CD includes additional disclosures related to forfeiture of advance money for transfer of capital assets, income liable to tax under the head income from other sources, amount received as deemed dividend, cash payments or receipts in excess of Rs 200,000 etc.

Further disclosures on transfer pricing secondary adjustments, General Anti-Tax Avoidance Rules (GAAR), Specified Financial Transactions, Country by Country Reporting (CbCR), Goods and Services Tax etc. have also been introduced in the modified Form 3CD.

While the Institute of Chartered Accountants of India (ICAI) has requested the CBDT to implement the new forms in FY 2018-19 with certain modifications to ensure smooth operations and timely compliance, businesses are worried about compliance in the interim.

Heavy hand of tax department

Income Tax rules require these taxpayers which include companies, proprietorships and partnerships with certain thresholds to get their accounts audited under Section 44AB. The auditor is expected to provide the audit report in the format prescribed by the Department.

As per the Section 44AB of the Income Tax Act, 1961, requires an assessee to furnish “the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.” Form 3CD is a statement of the particulars.

The limited time given by the authorities to switch to the new compliance requirement is the main grouse for most taxpayers. “The due date for tax audits is September 30, and most of the tax audits have already started. Now, it is very difficult for the auditor to complete these tax audits before August 19, to take the benefit of old forms,” says Sumit Maheshwari, Partner with Gurugram-based tax consulting firm, Ashok Maheshwary & Associates LLP.

The due date for tax audits is September 30, and most of the tax audits have already started. Now, it is very difficult for the auditor to complete these tax audits before August 19, to take the benefit of old forms.Sumit Maheshwari, Partner, Ashok Maheshwary & Associates LLP

By way of bringing this amended form, he says the department is discriminating against two sets of assesses, those who file the form by August 19 and others who do so later.

While the earlier Form 3CD had 41 clauses, and the amended Form includes around six amendments and 9 insertions resulting in 15 new changes. This means overall, there are now around 50 clauses with various sub-clauses in it, reveals Manan Agarwal, Partner at accounting and advisory firm, KrayMan Consultants LLP.

Time is not the only challenge with the Form 3CD. Some additional disclosures need tax auditors to pass value judgments, something which was not associated with the form so far.

“The auditor should be expected to report on objective facts; he should not be asked to sit in the chair of assessing officer and pass value judgements on various particulars,” the CA Institute had said in its recommendation note to the tax department.

Vijay Iyer, National Leader, Transfer Pricing, EY India explains this point further giving an illustration. He says the revised form for instance requires tax auditors to form a view if the company is GAAR-compliant or not.

And to come to a conclusion of that sort will require a detailed analysis of all the transactions company has carried all through. “You have to give them sufficient time,” he argues.

Iyer suggests that the biggest loser here will be the taxpayers. “It will cost more time and efforts for the companies to provide all information and data required. They will worry about the more intensive audit and additional cost.”

It will cost more time and efforts for the companies to provide all information and data required. They will worry about the more intensive audit and additional cost.Vijay Iyer, National Leader, Transfer Pricing, EY India

What happens if the CBDT does not defer the form 3CD?

Maheshwari is clear that if the tax department does not defer the forms, the assessee had no other option but to comply with them. “Non-compliance may attract penalty from the tax department, and they also have the option to reject the Tax Audit Report.”

In the situation of non-clarification of certain clauses and absence of appropriate guidance, most the taxpayers may attempt filing the tax audit report before the cut-off date i.e. August 20, fears Krayman’s Agarwal. And this may distort the objective of amending Form 3CD, he says.

But the delay in some instances can’t be ruled out as every taxpayer may not have the skill or the bandwidth to comply with this regulation in such a short span of time. “The immediate impact would be delay in filing the form 3CD by auditors and consequent delay in filing of income-tax returns by the taxpayers,” says S Vasudevan, Partner at law firm, Lakshmikumaran & Sridharan.

“In the worst-case scenario, the auditors may be forced to rely on management representations and caveat the form accordingly,” he adds.

In the worst-case scenario, the auditors may be forced to rely on management representations and caveat the form accordingly.S Vasudevan, Partner at law firm, Lakshmikumaran & Sridharan

Road Ahead?

It seems irrespective of the Department’s response, businesses must prepare for all eventualities.

“The information that requires judgment to be exercised by the auditor may be revisited by the tax department. Further, to provide breathing time to the industry as well as auditors, the form may be deferred, due-date of filing the income-tax return as well as uploading the financials on MCA website may be extended,” hopes Lakshmikumaran & Sridharan’s Vasudevan.